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Author: Julio Garín
Publisher:
ISBN:
Category : Common good
Languages : en
Pages : 40
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Book Description
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Author: Julio Garín
Publisher:
ISBN:
Category : Common good
Languages : en
Pages : 40
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Book Description
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Author: Kaushik Mitra
Publisher:
ISBN:
Category :
Languages : en
Pages : 29
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Author: Richard Dennis
Publisher:
ISBN:
Category : Gross domestic product
Languages : en
Pages : 42
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Author: David Beckworth
Publisher:
ISBN:
Category :
Languages : en
Pages : 29
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Book Description
Some economists have advocated nominal GDP targeting as an alternative to the Taylor Rule. These arguments are largely based on the idea that nominal GDP targeting would require less knowledge on the part of policymakers than a traditional Taylor Rule. In particular, a nominal GDP targeting rule would not require real-time knowledge of the output gap. We examine the importance of this claim by amending a standard New Keynesian model to assume that the central bank has imperfect information about the output gap and therefore must forecast the output gap based on previous information. Forecast errors by the central bank can then potentially induce unanticipated changes in the short term nominal interest rate, distinct from a standard monetary policy shock. We show that forecast errors of the output gap by the Federal Reserve can account for up to 13% of the fluctuations in the output gap. In addition, our simulations imply that a nominal GDP targeting rule would produce lower volatility in both inflation and the output gap in comparison with the Taylor Rule under imperfect information.
Author: Pranjul Bhandari
Publisher:
ISBN:
Category : Economic stabilization
Languages : en
Pages : 31
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Book Description
The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.
Author: Michael T. Belongia
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Nicholas Kumamoto
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ISBN:
Category : Global Financial Crisis, 2008-2009
Languages : en
Pages : 50
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Author: Scott Sumner
Publisher:
ISBN:
Category :
Languages : en
Pages : 17
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Book Description
Monetary policy is important for two key reasons. First, monetary policy determines the path of the price level, and it heavily influences other variables like nominal wages and nominal GDP. As seen in the 1970s, high inflation can be damaging to the health of the economy and to the well-being of individual citizens. Savers are punished, and resources are diverted from productive investments into inflation hedges such as gold. Second, monetary policy plays a big role in the business cycle. As demonstrated by the Great Depression, and to a lesser extent the global recession of 2008-2009, unstable monetary policy can lead to high unemployment and financial turmoil. Unpredictable monetary policy is especially harmful. The great amount of attention devoted to the Federal Reserve and its actions indicates that the current system is not as predictable as the market would like. A different monetary policy system could enhance predictability and ensure sound money.This primer will present one such system: nominal gross domestic product (NGDP) level targeting. The first section will clearly define monetary policy, describe the two main methods that central banks have traditionally used to carry out policy, and analyze the weaknesses of these methods. Later sections will articulate what NGDP is and how a policy of NGDP targeting works. Subsequent sections will list the most common criticisms of NGDP targeting and explain why these criticisms are misguided, and they will present arguments in support of the policy. Finally, the primer will provide specific recommendations for how to move from the current system to a system based on NGDP futures targeting.
Author: Roberto M. Billi
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Category :
Languages : en
Pages :
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Author: Yuwen Dai
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ISBN:
Category :
Languages : en
Pages : 0
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In the literature on monetary economics, there is the 'inflationary bias' result which predicts that the rate of inflation will be biased towards a higher level under discretionary monetary policy than under a rule-based policy regime. It is established that a credible nominal target can eliminate this 'inflationary bias'. In this paper, we examine the case of nominal GDP targeting, which is a rule-based monetary regime. Depending on the degree of conservativeness by the central bank, we show in a stylized model the choice of different combination of inflation and real GDP targets can still result in an 'inflationary bias', and there also exists the possibility of a 'dis-inflationary bias'
